SELECTED SUSTAINABLE DEVELOPMENT TRENDS IN THE LEAST DEVELOPED COUNTRIES 2018

SELECTED SUSTAINABLE DEVELOPMENT TRENDS IN

THE LEAST DEVELOPED COUNTRIES 2018

SELECTED SUSTAINABLE DEVELOPMENT TRENDS IN

THE LEAST DEVELOPED COUNTRIES 2018

Geneva, 2018

The designations employed and the presentation of material on any map in this work do not imply the expression of any opinion whatsoever on the part of the United Nations concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries.

Comprehensive and updated economic and social statistical data on the least developed countries can be accessed in the following UNCTAD publication: Statistical Tables on the Least Developed Countries – 2017, available at: http://unctad.org/en/PublicationsLibrary/ldcr2017stats_en.pdf.

This publication has not been formally edited.

© 2018, United Nations Conference on Trade and Development UNCTAD/ALDC/2018/1

Note

SLOWDOWN IN GROWTH TOOK LDC

FARTHER AWAY FROM SDG TARGETS

FALLING EXPORTS AND FDI, AND STAGNANT AID FLOWS CONSTRAIN LDCs’ ACCESS TO DEVELOPMENT FINANCE

POLICY IMPLICATIONS

SDG target 8.1 at least 7% GDP growth

per annum in the LDCs

Fewer LDCs meeting 7% GDP growth target

LDCs total export revenues

($ billion) FDI inflows to LDCs

($ billion) Net ODA disbursements to

LDCs ($ billion) LDC share

of global exports falling Industry's

contribution to GDP stagnant

Weak global demand and low commodity prices have shrunk LDC export revenues by -4.6%

Targeted support to the LDCs needs to accompany the moderate global rebound,

if SDGs are to be met

Structural transformation is critical for LDCs to embark on a sustainable

development path

Transformational energy access is key to unlock

higher-productivity activities FDI inflows to LDCs fell in

2016 (-13%, compared with a decline of 2% worldwide)

Aid flows to LDCs remain far below the SDG targets, and levelled-off in

2016 (+0.5% in real terms) SDG target 17.11

double the LDCs’ share of global exports by 2020

SDG target 9.2 double industry’s share

of GDP in the LDCs

2007 2012

2017

IPOA/SDG target

Actual Figure 2006

2006 2011 2016

0.8%

118

0.9%

1.6%

2016

2016 2013

2006

190 255

2006 2011 2015 2016

FDI

2015 2016

International target

19 39

43 38

43 43

76-96 75-96

5 17 14

25%

26%

25%

Foreword

This document is a contribution to the United Nations system’s efforts to follow up and monitor the implementation of Agenda 2030 for Sustainable Development, since it reviews recent progress against selected targets and indicators related explicitly to the 47 least developed countries (LDCs). Its conceptual starting point can be traced to paragraph 27 of the Agenda, and the stated commitment to “build strong economic foundations for all our countries (… and) strengthen the productive capacities of least developed countries in all sectors, including through structural transformation”.

In line with the above, the document presents a brief assessment of recent economic trends and progress towards selected Sustainable Development Goals (SDGs) targets and indicators in the LDCs.¹ In doing so, it highlights some of LDCs’ key development challenges, which stem from their own domestic conditions, but also from the specific terms of their interdependence within the global economy. Far from providing a full-fledged country-specific assessment, this document emphasises predominantly the latter international dimension, consistently with the view, expressed in paragraph 3 of the Nairobi Maafikiano, that “while each country has primary responsibility for its own economic and social development, the support of an enabling international environment is integral to the success of national efforts” (UNCTAD, 2016a).

The structure of the document is as follows. Section A discusses the performance of LDCs in terms of broad macroeconomic trends and inclusive growth, while section B delves into their implications for industrialization and structural transformation. Section C tackles key trade-related issues and balance of payment vulnerabilities;

while section D is devoted to the mobilization of development finance, through different sources. Finally, section E summarizes LDCs’ outlook for the near-term future.

S ^elected S ^uStainable d ^evelopment t ^{rendS in the} l ^eaSt d ^eveloped c ^ountrieS 2018

Contents

A. Economic growth ...2

B. Structural transformation ...7

C. International trade and current account ...10

1. Trade in goods and services ... 11

2. Current account balance ... 15

D. Resource mobilization ...17

1. Domestic resource mobilization ... 18

2. Official capital flows ... 19

3. Foreign direct investment (FDI) ... 21

4. Personal remittances ... 22

E. The economic outlook for least developed countries ...24

Notes ...25

References ...27

S ^elected S ^uStainable

d ^evelopment t ^{rendS in the}

l ^eaSt d ^eveloped c ^ountrieS

2018

A. Economic growth

“Sustain per capita economic growth in accordance with national circumstances and, in particular, at least 7 per cent gross domestic product

growth per annum in the LDCs” (Agenda 2030 target 8.1)

Real GDP per capita ^{in LDCs} rose

from $639 in 2016 to only $655 in 2017

but fell in 9 countries in 2017.

$639 in 2016

$655 in 2017

5 LDCs attained SDG target 8.1 ^{* in 2017:}

Bangladesh Djibouti Ethiopia Myanmar Nepal

*at least +7% GDP growth per annum in the LDCs

After weathering reasonably well the aftermath of the 2009 great recession, in the 2015-2016 biennium the LDCs bore the brunt of the global trade slowdown and of the anaemic recovery associated with insufficient global demand and mounting levels of inequality (UNCTAD, 2017a). In 2016 the LDC combined gross domestic product (GDP) experienced its lowest real growth rate since the beginning of the century (3.8 per cent), with as many as 14 LDCs (out of 45 for which individual country data is available) suffering a deterioration of real GDP per capita.² Preliminary data for 2017 and projections thereafter suggest that some improvements are indeed taking place, with LDC growth rate back at 5 per cent in 2017 and a projected 5.4 for 2018. The picking up of the global economy, however, may well take some time to consolidate and touch a greater number of countries. Moreover, a number of risk factors, including unresolved flaws in the prevailing economic policy framework, as well as heightened policy uncertainties, loom large on this tepid recovery (UNCTAD, 2017a; World Bank, 2017).

The above situation can be traced to the prevailing conditions of the world economy, and most notably to:

1. the anaemic recovery of developed economies, where aggregate demand has remained stifled by austerity measures, high levels of inequality, and uncertain “animal spirits” on the part of investors, notwithstanding expansionary monetary policies and bullish financial markets;

2. the slowdown of other (i.e. non-LDC) developing countries (especially outside the East Asian region), with several so-called “emerging economies”

becoming increasingly vulnerable to trade and financial shocks; and

3. the consequences of the strategic reorientation towards domestic-led growth in China, which has affected world demand for key commodities (UNCTAD, 2017a; Akyüz and Yu Ill, 2017).

Unless these issues are tackled through adequate and concerted policy efforts, there is a risk that a protracted lukewarm recovery will render it difficult for LDCs to generate and mobilize sufficient resources to strengthen their productive capacities, and foster economic diversification. This might also prolong — or possibly even worsen — the divergence between LDCs and other developing countries (ODCs), as the two groups of countries have displayed broadly similar rates of GDP growth since 2010, with LDCs experiencing a slower expansion in per capita terms.

If the 2015-2016 biennium witnessed a generalized downward levelling of GDP growth rates across LDCs, the timing and magnitude of this slowdown, as well as the pace of the ensuing rebound, varied across economies and regions, depending on structural socio-economic features, as well as idiosyncratic factors (Table 1). In African LDCs and Haiti — by far the largest and more numerous subgroup of LDCs — real GDP growth rate peaked in 2013 (+5.7 per cent), declined in the two following years (bottoming down at +2.9 per cent in 2016), and recovered thereafter.

Though on the positive side the rebound is expected to somewhat strengthen in 2018, GDP growth rates will likely continue to fall short not only of their 2002-2008 average, but also of their 2010-2014 levels. In Asian and Island LDCs, conversely, growth rates bottomed slightly earlier (already in 2015) but also witnessed an earlier and more pronounced rebound, particularly in the case of Asian LDCs.

Figure 1

Real GDP growth by country groups (Constant 2005 dollars)

Per cent

-4 -2 0 2 4 6 8

2002-2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 (p) 2018 (p)

LDCs Other developing countries Developed economies

Source: UNCTAD secretariat calculations based on data from IMF, World Economic Outlook database (accessed January 2018).

Notes: Calculation is based in applying GDP constant national currency growth to GDP current 2005 dollar and chained. (p) = projected.

Table 1

Dynamics of real GDP and real GDP per capita in LDCs, 2002–2018

Annual percentage growth of real GDP 2002–

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

LDCs 7.5 4.7 5.4 4.5 5.4 5.8 5.5 3.9 3.8 5.0 5.4

African LDCs and Haiti 8.0 4.1 4.9 4.7 4.8 5.7 5.4 4.3 2.9 4.1 4.4

Asian LDCs 6.7 5.6 6.3 4 6.5 6.2 5.7 3.1 5.3 6.4 6.8

Island LDCs 4.0 7.3 7.3 6.9 4.3 2.8 3.5 3.4 4.4 3.9 5.1

Annual percentage growth of real GDP per capita

LDCs 5.0 2.5 3.2 3.3 3.0 3.6 3.3 1.7 1.6 2.5 3.2

African LDCs and Haiti 5.0 1.5 2.2 3.8 1.9 3 2.7 1.7 0.4 1.5 1.8

Asian LDCs 5.2 4.3 4.9 2.5 4.9 4.7 4.3 1.8 3.7 4.2 5.7

Island LDCs 1.8 5.2 5.2 4.5 1.8 0.4 0.9 1.0 1.9 1.4 2.6

Real GDP per capita relative to ODCs (percentage)

LDCs 18.0 18.2 17.6 17.3 17.1 17.1 17.1 16.9 16.7 16.7 16.7

African LDCs and Haiti 17.8 17.9 17.1 16.9 16.6 16.5 16.4 16.2 15.9 15.6 15.4

Asian LDCs 17.9 18.3 18 17.6 17.8 17.9 18.1 17.9 18.1 18.3 18.7

Island LDCs 50.7 49.8 49.2 48.9 48 46.4 45.3 44.4 44.1 43.4 43.1

Real GDP per capita relative to developed countries (percentage)

LDCs 1.3 1.5 1.5 1.6 1.6 1.6 1.7 1.7 1.7 1.7 1.7

African LDCs and Haiti 1.3 1.5 1.5 1.5 1.5 1.6 1.6 1.6 1.6 1.6 1.6

Asian LDCs 1.3 1.5 1.6 1.6 1.7 1.7 1.8 1.8 1.8 1.9 1.9

Island LDCs 3.6 4.2 4.3 4.4 4.5 4.5 4.4 4.4 4.4 4.4 4.5

Source: UNCTAD secretariat calculations, based on data from IMF, World Economic Outlook database (accessed January 2018).

Notes: Data for 2017 and 2018 are forecasts.

The above pattern is largely consistent with the fact that African LDCs typically display a higher reliance on raw materials and primary commodities exports, with fuels accounting on average for nearly half of their merchandise exports revenues. Such heightened levels of export concentration on a narrow range of primary commodities expose countries to large exogenous shocks and ensuing boom-bust cycles, through reductions in the direct contribution of commodity industries to GDP, lower public revenues, as well as through contractions in export revenues and possibly FDI inflows (UNCTAD, 2013a, 2016b).

Against this background, international prices for most primary commodity categories have trended upwards since the late 2016, but this modest recovery barely made a dent to the significant drop experienced since 2011, particularly in the case of crude petroleum and minerals, ores and metals (Figure 2). Moreover, while the modest increase in commodity prices is projected to continue throughout 2018, large price swings are unlikely given slack supply capacities (United Nations, 2017). In this context, the price index for crude petroleum — accounting alone for roughly 30 per cent of LDCs’ combined merchandise exports — fell by nearly 50 per cent in 2015, and witnessed another decline of roughly 15 per cent in 2016, before rebounding by

approximately 20 per cent in 2017. International prices for minerals, ores and metals have followed a similar trend, declining by 22 per cent in 2015, then again by 6 per cent in 2016, to bounce back by 24 per cent in 2017. More generally, the price instability and volatility underscored by these trends represent by themselves a complex challenge for commodity-dependent developing countries, as they make macroeconomic policy conduct more difficult.

Growth performances across individual LDCs have continued to display wide (albeit somewhat declining) variation in 2017, as they did in the earlier biennium.

Three of the 45 LDCs for which data is available suffered full-fledged recessions (i.e. negative real GDP growth), mainly because of idiosyncratic shocks, such as internal conflict/insecurity situations: this is the case of Yemen (-2.0 per cent), South Sudan (-6.3 per cent), and Burundi (where a virtual stagnation in 2017 followed two consecutive years of recession).³ At the other end of the spectrum, several LDC economies have featured among the world’s most dynamic economies, and attained in 2017 the SDG 8.1 target of seven per cent GDP growth rate.⁴ This is the case of Bangladesh (+7.1 per cent), Djibouti (+7.0 per cent), Ethiopia (+8.5 per cent), Myanmar (+7.2 per cent), and Nepal (+7.5 per cent). Though slightly missing the SDG target, various

Figure 2

Evolution of commodity price indices, 2000–2017 (2000=100)

Price indices

0 50 100 150 200 250 300 350 400

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 All food Agricultural raw materials Minerals, ores and metals Crude petroleum

Source: UNCTAD secretariat calculations based on data from UNCTADstat database (accessed January 2018).

other LDCs posted real GDP growth in excess of six per cent: namely Burkina Faso, Cambodia, Guinea, Lao People’s Democratic Republic, Rwanda, Senegal and Sierra Leone.

Notwithstanding some encouraging performers, it is sobering to note that in 2017 only five of the 45 LDCs for which data is available achieved the SDG 8.1 target.

This represents only a marginal improvement over 2016:

the year with the smallest number of LDCs meeting the seven per cent growth target since its first adoption in the 2001 Brussels Programme of Action for the LDCs (Figure 3).⁵ This situation raises even more concerns,

Figure 3

Number of LDCs meeting the 7 per cent GDP growth target, and with declining GDP per capita, 2001–2018

Per cent

0 2 4 6 8 10 12 14 16 18

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 (p) 2018

(p) Countries meeting 7% growth target LDCs with declining GDP per capita

Source: UNCTAD secretariat calculations based on data from IMF, World Economic Outlook database (accessed January 2018).

Notes: For the sake of preserving comparability over time, the chart refers only to the 45 current LDCs for which data is available.

(p) = projected.

considering that the number of LDCs achieving the above-mentioned objective is projected to remain well below pre-crisis levels also for 2018.

Considered in conjunction with LDCs’ comparatively rapid demographic growth — on average 2.4 per cent per year in 2017— this faltering dynamism is mirrored in the sluggish rise of real GDP per capita, which, for the LDCs as a group, went from $639 in 2016 to $655 in 2017 (at current prices). This implies for 2017 a real growth rate of GDP per capita reaching barely 2.5 per cent, higher than in 2016 (1.6 per cent) but roughly half of its pre-crisis level (and lower that in the 2012-2014

window). These trends of real GDP per capita underpin LDCs’ continued divergence from ODCs in the post- 2009 period, as well as their very modest catching up vis-à-vis developed economies (Table 1). Asian LDCs represent somewhat an exception to this trend, having proved capable of matching the performance of ODCs in terms of GDP per capita. Even in their case, however, meaningful income convergence remains elusive.

Looking at the performance of individual countries, the generalized slowdown of LDC economies over the last two-three years has been accompanied by an increase in the number of LDCs experiencing gradual deteriorations in the average standards of living, as measured by real GDP per capita. In 2017, as many as nine LDCs were in this situation, including two countries where the decline exceeded three per cent:

Afghanistan (-7 per cent) and Yemen (-4.8 per cent).

The share of industrial sector

in GDP fell in 2017

in more than half ^{of the} LDCs

- taking them even further

away from SDG target 9.2

The share of real manufacturing

value-added in GDP fell

from 2006 to 2016 in all LDCs Except in

Bangladesh, Myanmar, Lao PDR and Uganda

B. Structural transformation

“Promote inclusive and sustainable industrialization and, by 2030, significantly raise industry’s share of employment and gross domestic product, in line with national circumstances, and double its share in LDCs”

(SDG target 9.2)

The uneven and somewhat erratic growth trends discussed above are accompanied by sluggish structural transformation, with many LDCs falling short of the inclusive and sustainable industrialization envisaged in SDG target 9.2. Although there have been some encouraging signs, notably in terms of rising output per worker and manufacturing value added, in many instances economic expansion has failed to provide the foundations for sustained structural transformation.⁶ This concern is confirmed by the evolution of the sectoral composition of output for LDCs as a group, between 2000 and 2016 (the latest year for which data is available). Although value added (measured in constant 2010 dollars) rose visibly in both agriculture and industry, these sectors experienced a slight contraction of their relative contribution to GDP:

from 30 to 25 per cent in the case of agriculture, and from 28 to 25 per cent in the case of industry. Services, conversely, increased their weight from 41 per cent to nearly 50 per cent of GDP. This sector conflates, however, widespread traditional activities such as trade or transport, with circumscribed pockets of high- productivity services, such as finance or information and communication technologies.

Notwithstanding a considerable heterogeneity across individual LDCs, these sobering considerations seem to apply also at country level. If the importance of agriculture declined in more than two thirds of the LDCs for which data is available — in line with the long-established stylized facts — only in a handful of cases this coincided with a significant expansion of the industrial sector; more often than not, services enjoyed by far the largest relative expansion (Figure 4). In fact, more than half of the LDCs in Figure 4 actually display a shrinking of the industrial sector’s weight over the period considered, including nearly all the LDCs where agriculture increased its share of GDP.

Although SDG 9 refers to industry as a whole, disentangling its various components — namely mining and quarrying; manufacturing; electricity, gas and water supply; and construction — is of fundamental importance. Accordingly, Figure 5 focuses only on what is commonly regarded as the main engine for

“sustainable industrialization” and catching up growth:

the manufacturing sector. On the positive side, between 2006 and 2016 real manufacturing value added (MVA) increased in nearly all LDCs, with some of the top performers (typically those experiencing the sharpest growth accelerations) reaching annual growth

rates exceeding 7 per cent. On the negative side, though, in most countries this was accompanied by a relative decline in the manufacturing share of total value added, pointing to a widespread risk of premature de- industrialization among LDCs.

The evidence presented above validates UNCTAD’s views that, even during phases of rapid economic growth, LDC economies have often struggled to foster the emergence of high-productivity activities in the manufacturing and specialized services sectors (UNCTAD, 2010, 2013b, 2014). This situation, coupled with the capital-intensive nature of extractive industries underpinning much of the pre-crisis boom, has failed to generate sufficient employment outside (mainly small-holder) agriculture, leaving the growing labour force to be re-absorbed mainly through the expansion of (often low-productivity) services. This pattern of structural change has resulted in widespread underemployment and informality. It has also implied that labour reallocation fostered only a modest upward convergence of productivity levels across sectors, contributing only weakly to overall productivity growth (McMillan et al., 2014).

LDCs’ infrastructural gaps and supply-side bottlenecks play a key — though by no mean exclusive — role in constraining productivity growth and dampening prospects for economic diversification. Modern energy provision deserves explicit mention in this respect, not only because it is the specific object of SDG 7, but more fundamentally because it is identified as a major constraint for 42 per cent of LDC firms, and LDC countries nowadays account for the majority of people lacking access to electricity worldwide (UNCTAD, 2017b).⁷ If reaching the SDG target of universal access to modern energy certainly entails daunting challenges for the LDCs and the international community at large, accelerating the current rate of progress in that direction also brings enormous development opportunities, particularly if one moves beyond a narrow focus on household necessities, to cater for productive energy uses. Doing so might open transformative opportunities for rural non-farming activities, as well as reduce the competitiveness wedge LDC producers face, and foster the emergence of higher value added activities in urban and peri-urban centres. In this respect, a closer integration of energy policies and broader development strategies promises to better harness the mutually supportive relation between structural transformation and modern energy provision (UNCTAD, 2017b).

Figure 5

Evolution of the manufacturing sector performance in the LDCs, 2006–2016

2006–2016 annual growth rate of manufacturing value added (constant 2010 $)

Change in manufacturing value added contribution to GDP 2006–2016 Declining MVA, relative industrialization Declining MVA, relative de-industrialization

Growth of MVA, relative industrialization Growth of MVA, relative de-industrialization

Afghanistan

Lesotho

Mozambique Togo

Liberia Malawi

Cambodia

Gambia

United Rep. of Tanzania

Zambia

Nepal Burundi

Sierra Leone Ethiopia

Mauritania

Dem. Rep. of the Congo Rwanda

Burkina Faso Bhutan

Lao People's Dem. Rep.

Bangladesh

Uganda

Yemen

Myanmar

-5 0 5 10 15 20

-10 -5 0 5 10

Source: UNCTAD secretariat calculations based on data from World Development Indicators database (accessed January 2018).

Figure 4

Changes in the sectoral composition of output in LDCs, 2006–2016

2006-2016 change in services % contribution to GDP

2006-2016 change in industry % contribution to GDP

LDCs with declining agricultural contribution to GDP LDCs with increasing agricultural contribution to GDP 45o

Liberia

Myanmar Lao People's Dem. Rep.

Central African Rep.

Ethiopia

Zambia Afghanistan

Chad Malawi

Burkina Faso Rwanda

Gambia

Cambodia Bhutan Burundi

Bangladesh Madagascar Benin

Mozambique Nepal

Yemen

Dem. Rep. of the Congo Uganda

Lesotho

United Rep. of Tanzania Senegal

Guinea Mauritania

Togo

Guinea-Bissau Sierra Leone

Mali Sudan

-10 -5 0 5 10 15 20 25

-30 -25 -20 -15 -10 -5 0 5 10 15 20

Source: UNCTAD secretariat calculations based on data from World Development Indicators database (accessed January 2018).

C. International trade and current account

“Significantly increase the exports of developing countries, in particular with a view to doubling the LDCs’ share of global exports by 2020”

(SDG target 17.11)

In 2016 LDCs accounted for barely

0.92% ^{of global} exports ^;

roughly the same level as in 2007

SDG target 17.11 is not being met

In 2016, ⁱⁿ LDCs ^, exports of

goods and services

were $190 billion and imports $287 billion.

Imports

$287 billion

Exports

$190 billion

1. Trade in goods and services

After a global trade slowdown of historical magnitude in 2016, worldwide trade flows witnessed a modest but accelerating rebound in real terms during the course of 2017. According to UNCTAD’s estimates, worldwide volume growth rates over the previous year attained roughly 4 percent for the first three quarters of 2017. International trade flows are expected to continue picking up, but significant downside risks continue looming (UNCTAD, 2017a; United Nations, 2017; World Bank, 2017). The stalemate on the Doha Development Agenda — whose conclusion is called for in the 2030 Agenda for Sustainable Development

— and the risk of renewed protectionism only add a further dimension to policy uncertainties.⁹

More fundamentally, even the expected modest expansion in world trade is unlikely to reverse LDCs’

long-standing marginalization in the international trade arena (Figure 6); all the more so if it is coupled with a protracted slack in global demand, and with tepid pickup in commodity prices. If between 2005 and 2013 LDCs’ share of global exports of goods and services had climbed up gently — from 0.75 per cent to 1.09 per cent, respectively — much of these gains have evaporated in the last few years. In 2016 LDCs accounted for barely 0.92 per cent of the total;

roughly the same level as in 2007.¹⁰ Moreover, even though their share of world exports remains higher with respect to merchandise goods than services, nearly all the relative decline in LDC weight in world total exports can be traced to the former element. Only three years away from the 2020 timeline, this worrying situation underscores the difficulties in meeting the SDG 17.11

target of doubling LDCs share of global exports, particularly in a context of rather modest rebound of international commodity prices.¹¹

For the LDCs as a group, exports of goods and services for 2016 were estimated at approximately $190 billion, with a decline of $10 billion (or 4.6 per cent) compared to 2015; the third consecutive contraction from the peak of 2013, when LDC nominal export revenues totalled

$ 255 billion (Table 2). This downward trend stemmed from a simultaneous contraction of merchandise goods exports — which fell from $161 billion in 2015 to $154 billion in 2016 — and a more modest decline in LDC services exports (from nearly $38 billion to $36 billion).

The fall in total export revenues has however been more than offset by the parallel decline of imports of goods and services, which shrank from $300 billion in 2015 to $287 billion in 2016, leading to a slight reduction of LDCs’ combined trade deficit. Between 2015 and 2016, the latter declined from $101 billion to less than $98 billon. On a longer-term horizon, however, LDCs’ combined trade deficit has been widening significantly in the wake of the financial crisis. It rose from $45 billion in 2009 to $98 billion in 2016, pointing to the association between the weak development of domestic productive capacities and structural deficits in the trade balance.

Since 2013, when the decline of commodity prices caused a decline in African LDCs’ and Haiti’s commodity exports, a common feature across LDC groupings has been the simultaneous occurrence of negative trade balances for both goods and services. Beyond this commonality, however, regional trends appear to be largely driven by differences in trade structures Figure 6

LDCs’ share of global exports, 2005–2016

Per cent

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Goods Services Total

Source: UNCTAD secretariat calculations based on data from UNCTADstat database (accessed January 2018).

Notes: The series reported here are compiled on the basis of the IMF Balance of Payments and International Investment Position Manual, Sixth Edition (BPM6).

Table 2

LDC exports and imports of goods and services, 2005–2016, selected years (Millions of current dollars )

2005 2010 2013 2014 2015 2016 % change

2015–

2016 Total trade in goods and services

Exports

LDCs 95 918 191 21 255 244 251 242 199 099 189 967 -4.6

African LDCs and Haiti 66 945 138 833 183 183 174 694 126 772 117 595 -7.2

Asian LDCs 28 549 51 495 70 814 75 254 71 144 71 136 0.0

Island LDCs 424 882 1 247 1 294 1 183 1 236 4.5

Imports

LDCs 108 181 220 802 313 045 336 459 300 453 287 651 -4.3

African LDCs and Haiti 72 955 151 564 210 742 223 036 190 965 175 219 -8.2

Asian LDCs 34 334 66 412 99 242 110 355 106 379 109 451 2.9

Island LDCs 892 2 826 3 061 3 068 3 109 2 981 -4.1

Trade balance

LDCs -12 262 -29 593 -57 801 -85 217 -101 354 -97 684 -3.6

African LDCs and Haiti -6 01 -12 732 -27 559 -48 342 -64 193 -57 624 -10.2

Asian LDCs -5 784 -14 917 -28 427 -35 101 -35 234 -38 315 8.7

Island LDCs -468 -1 944 -1 814 -1 775 -1 926 -1 745 -9.4

Total trade in goods

Exports

LDCs 83 887 166 789 218 373 212 68 161 413 153 634 -4.8

African LDCs and Haiti 59 101 124 75 161 066 152 136 104 457 96 523 -7.6

Asian LDCs 24 608 41 689 56 743 59 942 56 411 56 587 0.3

Island LDCs 178 350 564 602 545 524 -4.0

Imports

LDCs 79 852 159 362 231 883 249 673 227 348 218 866 -3.7

African LDCs and Haiti 50 237 102 634 147 286 155 708 135 972 126 231 -7.2

Asian LDCs 28 966 55 453 82 686 91 97 89 521 90 896 1.5

Island LDCs 649 1 274 1 91 1 996 1 855 1 739 -6.3

Trade balance

LDCs 4 034 7 427 -13 51 -36 992 -65 935 -65 233 -1.1

African LDCs and Haiti 8 864 22 116 13 78 -3 572 -31 514 -29 708 -5.7

Asian LDCs -4 358 -13 765 -25 943 -32 027 -33 111 -34 309 3.6

Island LDCs -471 -924 -1 346 -1 393 -1 31 -1 215 -7.2

Total trade in services

Exports

LDCs 12 032 24 421 36 871 38 562 37 686 36 333 -3.6

African LDCs and Haiti 7 844 14 083 22 117 22 559 22 314 21 072 -5.6

Asian LDCs 3 942 9 806 14 071 15 312 14 734 14 549 -1.3

Island LDCs 246 532 683 692 638 713 11.8

Imports

LDCs 28 329 61 441 81 162 86 786 73 105 68 785 -5.9

African LDCs and Haiti 22 718 48 93 63 456 67 328 54 993 48 988 -10.9

Asian LDCs 5 368 10 959 16 556 18 385 16 858 18 555 10.1

Island LDCs 243 1 552 1 151 1 073 1 254 1 242 -0.9

Trade balance

LDCs -16 297 -37 02 -44 291 -48 224 -35 419 -32 451 -8.4

African LDCs and Haiti -14 873 -34 847 -41 339 -44 769 -32 679 -27 915 -14.6

Asian LDCs -1 427 -1 152 -2 484 -3 074 -2 124 -4 006 88.6

Island LDCs 3 -1 02 -468 -381 -616 -530 -14.1

Source: UNCTAD secretariat calculations, based on data from the UNCTADstat database (accessed January 2018).

and composition, as well as considerations related to individual countries’ size.

In the case of African LDCs and Haiti, the dominant development has arguably been the three-year- long decline in the exports of merchandise goods, associated with falling commodity prices: considering goods only, exports revenues shrank by more than a third, from $161 billion in 2013 to $96 billion in 2016.

Albeit with some lag, this has implied a compression of merchandise imports, which retrenched from a peak of

$156 billion in 2014 to $136 billion in 2015, and finally

$126 billion in 2016. Trade in services has followed a similar trend, albeit suffering a milder decline, resulting in a further shrinking of the trade balance. For what pertains to Asian LDCs, exports of both goods and services were stable in 2016 — after the sizable slump of the previous year — while the broadening trade deficit can be largely ascribed to the rising import bill.

In the case of island LDCs, finally, merchandise exports have suffered a further decline from the 2014 peak, falling by 4 per cent year-on-year (from $545 million in 2015 to $524 million in 2016). Yet, as prices for sensitive imports such as food and fuels remained low, the shrinking of the import bill and the dynamism of services exports contributed to a 9-per-cent reduction in the overall trade deficit.

The above trends point to the long-standing flaws in the terms of LDCs’ integration into the global market, as underpinned by the structural occurrence of trade deficits among LDCs — in 2016 as many as 43 of the 46 LDCs for which data is available recorded one — as well as their lopsided trade specialization patterns, summarized in Figure 7. On the merchandise export side, LDC export composition continues to

Figure 7

Composition of LDCs’ merchandise imports and exports, 2016

Food & Agriculture

Fuels

Ores, metals, precious stones and non-monetary gold

Manufactures

A. Merchandise exports, 2016

LDCs African LDCs and Haiti Asian LDCs Island LDCs

0 20 40 60 80 100 0 20 40 60 80

B. Merchandise imports, 2016

Source: UNCTAD secretariat calculations based on data from UNCTADstat database (accessed January 2018).

be heavily skewed towards primary commodities, typically exported as raw material embodying limited domestic value addition.¹² The notable exception to this pattern is the Asian LDCs, which account for over three quarters of LDC manufactured exports, thanks to their comparative advantage in labour-intensive and resource-intensive manufactures (Figure 8). In other regions, however, primary commodity dependence is extremely widespread. Among African LDC and Haiti, for instance, fuels and minerals accounted respectively for 44 and 28 per cent of merchandise exports in 2016;

food and agricultural exports, similarly, represented as much as 86 per cent of merchandise exports originating in island LDCs. On the import side, conversely, LDCs across all regions rely heavily on international trade for their access to manufactured goods – which account for roughly two thirds of the total merchandise imports bill – as well as other sensitive products such as food and fuels. In light of this pattern, import compression may entail wide-ranging negative effects on LDCs’

productive base, thereby undermining the prospects for structural transformation.

Often branded as “commodity dependence trap”, this pattern of trade specialization typical of many LDCs is by itself both a consequence of the sluggishness of productive capacity development, and often a further hindrance to the structural transformation process.

Indeed, it implies a heightened balance of payment vulnerability for commodity-dependent developing countries, through a greater exposure to exogenous price shocks, and possibly to the secular decline of primary commodities relative prices, consistently with the Prebisch-Singer hypothesis (UNCTAD, 2013a, 2016b).

Figure 8

Composition of LDCs’ exports of manufactured goods by type and origin, 2016

Asian LDCs

$41,496 ^{Asian LDCs}_$1,054

Asian LDCs

$1,561

Asian

$1,180LDCs African

LDCs Haitiand

$3,316 African

LDCs and Haiti

$1,283 African LDCs

and Haiti

$2,388

African LDCs Haitiand

$703 Labour-intensive and resource-intensive manufactures

Low-skill and technology-intensive manufactures Medium-skill and technology-intensive manufactures

High-skill and technology-intensive manufactures Island LDCs (total manufactures)

Source: UNCTAD secretariat calculations based on data from UNCTADstat database (accessed January 2018).

Figure 9

Terms of trade, exports and imports volume indices for LDCs. 2000–2016

0 100 200 300 400 500 600

2000 2002 2004 2006 2008 2010 2012 2014 2016 2000 2002 2004 2006 2008 2010 2012 2014 2016

2000 2002 2004 2006 2008 2010 2012 2014 2016 2000 2002 2004 2006 2008 2010 2012 2014 2016

A. LDC total B. African LDCs and Haiti

0 100 200 300 400 500 600

C. Asian LDCs D. IslandLDCs

0 100 200 300 400 500 600

Terms of trade index

Indices

Volume index of exports Volume index of imports 0

100 200 300 400 500 600

Source: UNCTAD secretariat calculations based on data from UNCTADstat database (accessed January 2018).

The above interpretation of the evidence is vindicated by the evolution of terms of trade and exports/imports volume indices across LDC groupings (Figure 9).

Despite the impact of the 2009 global financial and economic crisis, LDC merchandise exports have increased significantly in volume terms, to the extent that the corresponding index for the whole LDC group rose from 100 in the year 2000 to 285 in 2011, and 376 in 2016 (Figure 9, panel A). Across African LDCs and Haiti (Figure 9, panel B), however, the expansion

of merchandise imports, in volume terms, has largely outpaced that of merchandise exports. Hence, as long as high commodity prices (especially for fuels) sustained the terms of trade, the group actually posted a trade surplus; but as the positive terms of trade shock waned out, import compression became inevitable. This situation contrasts sharply with the prevailing developments among Asian LDCs (panel C), where merchandise exports and imports grew at a similar pace (at least in volume terms), as well as among

island LDCs, where export volumes clearly outpaced import ones. Both Asian and island LDCs, however, have posted broadly stable or slightly declining terms of trade since the early 2000s, which explains why the sustained boost in export volumes translated only marginally into improved trade balances.

2. Current account balance

The trade-related considerations developed above represent, quantitatively, the main driver of LDCs’ current account balance, even though the latter also reflects the evolution of primary income and current transfers (in the case of LDCs, mainly workers’ remittances and current international cooperation). In 2017 the LDCs as a group are projected to register a current account deficit of $50 billion, the second-highest deficit posted so far, at least in nominal terms (Figure 10). This stands in contrast with ODCs, which, as a group, registered a current account surplus. Moreover, projections for 2018 suggest that the combined LDCs current account deficit is expected to expand further, exacerbating possible balance of payment weaknesses and external debt vulnerabilities.

All LDC subgroups appear to have experienced a net current account deficit in 2017. In the case of the African LDCs and Haiti, it amounted to $40.1 billion, with a 6-per-cent reduction compared with 2016.

Asian LDCs, instead, appear to have registered a sharp increase in their combined current account deficit reaching $10.1 billion, almost double the $5.3 billion

deficit of the previous year. Unlike in the recent past, finally, island LDCs have posted in 2017 a combined current account deficit of $0.5 billion, which compares with the small surplus of $0.1 billion in 2015.

Regional aggregates must be interpreted with caution, however, as they hide considerable heterogeneity across individual countries (Figure 11). Only a handful of LDCs, according to estimates of the International Monetary Fund (IMF), recorded current account surpluses in 2017: this includes two relatively large recipient of official development assistance (ODA) flows, namely Afghanistan and South Sudan, as well as Eritrea and Guinea Bissau. All other LDCs recorded current account deficits of variable magnitude, ranging from less than one percentage points of GDP as in Bangladesh and Nepal, to more than 25 per cent of GDP in Bhutan, Guinea, Liberia, Mozambique, and Tuvalu.

The comparison of current account balances in 2017 with the corresponding values for 2016 (as well as previous years not reported in Figure 11) suggests that large year-on-year changes tend to be rather uncommon among LDCs, and typically occur in small- size economies whose dependence on foreign trade is higher. LDCs’ current account imbalance, thus, arguably reflect structural issues and/or medium-term trends related to the differentiated decline in export and import flows, influenced especially by the subdued dynamics of commodity prices discussed above.

Figure 10

Current account balance of LDCs, 2000–2018

-70 -60 -50 -40 -30 -20 -10 0 10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 (p) 2018

(p)

Billion of current dollars

African LDCs and Haiti Asian LDCs Island LDCs LDCs total

Source: UNCTAD secretariat calculations based on data from IMF, World Economic Outlook database (accessed January 2018).

Note: (p) = projected.

Figure 11

Current account balance as percentage of GDP, 2016–2017

-50 -40 -30 -20 -10 0 10 20

Tuvalu BhutanLiberia MozambiqueSierra LeoneMauritaniaVanuatuSomaliaBurundiDjiboutiGuineaNiger Sao Tome and PrincipeCentral African Rep.Rwanda Lao Peopple's Dem. Rep.The GambiaCambodiaComorosMalawiBenin Lesotho EthiopiaTogo Burkina FasoTimor-LesteMyanmarMali United Rep. of TanzaniaSolomon IslandsMadagascarSenegalUgandaKiribatiAngola Dem. Rep. of the CongoGuinea-BissauSouth SudanBangladeshAfghanistanZambiaYemenSudanEritreaNepalChadHaiti

Percentage of GDP

2016 2017

Source: UNCTAD secretariat calculations based on data from IMF, World Economic Outlook, (accessed January 2018).

D. Resource mobilization

“Ensure significant mobilization of resources from a variety of sources (…), in order to provide adequate and predictable means for developing

countries, in particular LDCs, to implement programmes and policies to end poverty in all its dimensions” (SDG target 1a)

Net ODA to LDCs

in 2016 was

27% ^{of net}

ODA disbursed

to developing countries.

$43.1

billion

Remittances to LDCs as a group totalled

$36.9 billion ^{in 2017 ,}

down by 2.6% compared to the peak of $37.9 billion

in 2016.

1. Domestic resource mobilization

Domestic resource mobilization has long been identified as a policy imperative for LDCs and developing countries more broadly. It featured as a priority area for action in the IPoA, and has since been recognized as a fundamental route for LDCs to finance their development by the Addis Ababa Action Agenda of the third International Conference on Financing for Development (2015) and the 2030 Agenda for Sustainable Development. In most LDCs, however, efforts to mobilize domestic resources for investment are often undermined by the poor development of domestic financial markets, the narrow tax base and weak tax collection and administration systems, as well as by the pervasiveness of illicit financial flows, notably through trade misinvoicing (UNECA, 2015; UNCTAD, 2016c).

By virtue of national accounting identities, the weaknesses in the development of LDCs’ productive capacities, which typically lead to structural trade deficits, is reflected in LDCs’ heightened reliance on external sources of funding in order to finance investments in capital accumulation. The external resource gap (that is, the difference between the gross fixed capital formation rate and the gross domestic savings rate) of LDCs as a group averaged 6.9 per cent of GDP in 2015, up from 4.9 per cent in 2014.¹⁴ Consistently with the relatively long-term nature of investment projects, such an increase in the resource gap reflects the relative resilience of the investment ratio (which declined slightly from 26.7 to 26.1 per cent of GDP) vis-à-vis a much larger fall in gross domestic savings, which shrank on average by two percentage points of GDP.¹⁵

There is, however, significant heterogeneity among LDC subgroups, and individual economies, with only a handful of oil-rich and mineral-rich LDCs having gross domestic savings which far outstrip gross fixed capital formation.¹⁶ After increasing steadily to the 2009 financial and economic crisis (when it peaked at 27 per cent of GDP), gross fixed capital formation in

African LDCs and Haiti has levelled off around 26 per cent of GDP, with a slight decline in 2015 (Table 3). The gross domestic savings rate, conversely, has followed a broadly similar trend, but began trending downward already in 2013, thereby widening the resource gap for African LDCs and Haiti to nearly 7 per cent of GDP.

Among Asian LDCs, on the other hand, the external resource gap has been on the rise since 2011 and surpassed 7.4 per cent of GDP in 2015, largely as a result of the continued dynamism of capital investments (27 per cent of GDP in 2015) and simultaneous drop in the saving rate. Since the mid 2000s island LDCs as a group have continued facing an external resource surplus (rather than a gap), which attained 14.1 per cent of GDP in 2015. This aggregate figure, however, can be misleading as it reflects exclusively the relatively large savings–investment surplus of Timor-Leste, with all other island LDCs (the Comoros, Kiribati, Sao Tome and Principe, Solomon Islands, Tuvalu and Vanuatu) recording external resource gaps, ranging from 1.8 per cent of GDP in Vanuatu to 83.9 per cent in Kiribati.

In so far as LDCs renew their efforts to boost capital accumulation, in order to accelerate structural transformation and foster economic growth, the presence of an external resource gap is somewhat to be expected, and does not necessarily raise concerns over the medium term. The overall sustainability of this process hinges, however, on its effectiveness in fostering the development of domestic productive capacities, thereby spurring the diversification of the economy towards gradually more sophisticated and higher value-added sectors. Beyond the overall level of indebtedness, the composition of liabilities in terms of maturity and currency denomination, bear key implications for LDCs’ debt sustainability and balance of payment equilibrium.

Recent data reported in Figure 12 suggest that levels of external indebtedness have been surging across LDCs, both in terms of debt stocks (relative to gross national income - GNI), and — even more so — in terms of burden of debt services (measures as interest payments relative to exports of goods and services plus primary Table 3

Gross fixed capital formation, gross domestic savings and external resource gap in LDCs (Percentage of GDP)

Gross fixed capital formation Gross domestic savings External resource gap 2002–

2008 2013 2014 2015 2002–

2008 2013 2014 2015 2002–

2008 2013 2014 2015

LDCs (total) 22.3 26.5 26.7 26.1 19.6 22 21.8 19.2 -2.7 -4.5 -4.9 -6.9

African LDCs and Haiti 22.7 26.6 26.7 25.5 21.2 22.6 22.2 18.7 -1.5 -4 -4.6 -6.8

Asian LDCs 22.0 26.5 26.9 27.1 16.4 20.3 21.0 19.8 -5.6 -6.3 -6 -7.4

Islands LDCs 12.3 14.8 17.5 16.5 31.7 41.2 28.5 30.6 19.4 26.4 11.0 14.1

Source: UNCTAD secretariat calculations, based on data from the UNCTADstat database (accessed January 2018).

income). Between 2014 and 2016, the external debt stock in the median LDC has increased from 25.7 per cent of GNI to 27.8 per cent; simultaneously, external debt service has climbed by roughly 25 per cent in two years, attaining 1.32 per cent of exports of goods and services plus primary income. This situation has raised some concerns especially in the African region, where several countries have experienced sharp rise in their level of external indebtedness (UNCTAD, 2016d).

The seriousness of this issue is confirmed by the latest update of the Debt Sustainability Framework, jointly conducted by the World Bank and the International Monetary Fund. As of January 2018, out of 44 LDCs assessed in this respect:

• Eight displayed low risk of debt distress (Bangladesh, Cambodia, Myanmar, Nepal, Rwanda, Senegal, United Republic of Tanzania, and Uganda);

• 21 displayed moderate risk (Benin, Bhutan, Burkina Faso, Comoros, Democratic Republic of the Congo, Ethiopia, Guinea, Guinea-Bissau, Lesotho, Liberia, Madagascar, Malawi, Mali, Mozambique, Niger, Sierra Leone, Solomon Islands, Timor-Leste, Togo, Vanuatu and Yemen);

• 12 were at high risk of debt distress (Afghanistan, Burundi, Central African Republic, Djibouti, The Gambia, Haiti, Kiribati, Lao People’s Democratic Republic, Mauritania, Sao Tome and Principe, Tuvalu and Zambia); and

• Three were in debt distress, namely Chad, South Sudan and Sudan.¹⁷

In other words, approximately one third of LDCs are at higher risk of debt distress or already in that situation. In this context, UNCTAD has long urged the international community to set up an ordered mechanism for debt

resolution (UNCTAD, 2017a). In a context of rising investment needs of the LDCs, however, moving away from debt-creating instruments and prolonged aid dependency is a more fundamental albeit longer- term imperative. This requires LDCs to devise effective ways to mobilize alternative and innovative sources of finance — including where appropriate and possible remittances and diaspora savings — while also stymying illicit financial flows which deprive their economies of much-needed capital (UNCTAD, 2012, 2016c).

2. Official capital flows

LDCs have traditionally financed their external resource gap through a mixture of official development financing¹⁸

— including ODA — and private resource flows, notably foreign direct investment (FDI) and remittances. Private financial flows and portfolio investments tend to play a marginal role in LDC external financing, while FDI and remittances are largely concentrated in a relatively small number of LDCs. This leaves LDCs typically displaying a higher reliance on ODA, as compared to ODCs. Such relevance is explicitly recognized by the IPoA and by SDG target 17.2, which calls on developed countries to “implement fully their official development assistance commitments, including the commitment by many developed countries to achieve the target of 0.7 per cent of gross national income for official development assistance (ODA/GNI) to developing countries and 0.15 to 0.20 per cent of ODA/GNI to least developed countries; ODA providers are encouraged to consider setting a target to provide at least 0.20 per cent of ODA/GNI to least developed countries”.

Against this background, total net ODA disbursed to LDCs in 2016 amounted to $43.1 billion, representing Figure 12

External indebtedness across LDCs, 2014–2016

100 90 80 70 60 50 40 30 20 10 0

18 16 14 12 10 8 6 4 2 0

A. External debt stocks B. Interest payments on external debt

Percentage of GNI Percentage of exports of goods and services plus primary income

2014 2015 2016

X X

X X

X X

X

Source: UNCTAD secretariat calculations based on data from World Development Indicators database (accessed January 2018).

Notes: Boxplots visually display the distribution of LDC data over their quartiles, highlighting the mean (cross), median (horizontal line), first/third quartile (box), upper/

lower extreme (whiskers), and outliers.